For much of this crisis, I have been a bit critical of the Bank of England. The financial stability risks that triggered the downturn were pretty much buried among a catch-all of about 87* other issues before the crisis, and when the storm broke Governor Mervyn King was worried far too much about moral hazard than the more practical issue of the UK banking sector collapsing. Add to that the fact that the MPC didn’t even start to cut interest rates until the UK economy had already been in recession for six months, and it’s not hard to see why the BoE hasn’t been flavour of the month in many people’s eyes.
One of the things I’ve been particularly critical about is the BoE’s communication about policy. In part, this reflected the mad scramble to come up with explanations for how quantitative easing would work – and then various different metrics for knowing whether it had worked or not. In part, it also reflected that fact that, in a Committee with 9 individuals, there are always going to be different views (and they can all get voiced in public). But, nonetheless, I still think the BoE could have given a far clearer steer on inflation and policy over the past three or four years.
Happily, there are signs that this criticism – albeit probably from more distinguished commentators than myself – is starting to have an impact. Mervyn’s speech on 25 January was pretty darn good, spelling out the issues facing policymakers very clearly. And his performance at Wednesday’s press conference, to mark the publication of the February 2011 Inflation Report, was masterful.
Although he probably leans towards the more dovish side of the Committee at the moment, Mervyn was at pains to emphasise the range of risks to inflation over the medium term, both on the upside and on the downside. He spelt out again that, whatever the MPC did, consumers would have to see the real value of their take-home pay fall. And he also described, plainly and in detail, the ‘relative price’ effects that are hitting the UK economy at the moment. One chart in the Inflation Report (4.8 on pg 36, in case you’re interested) put it very clearly – strip out the impact of VAT, energy prices and imports, and CPI inflation would be somewhere between -0.5% and +1.0%. While some may question the validity of this approach, the fact remains that unless VAT goes up to 22.5% in January 2012, or energy and food prices continue to rise (or sterling falls again), inflation will fall back in 2012. Permanently higher levels of food and energy prices, by themselves, have only a temporary impact on inflation.
To ram the message home, Mervyn then re-iterated what we all know but often forget – changing interest rates today will have very little (if any) impact on inflation this year. Ironically, inflation could even have peaked by the time the MPC really next gets to grips with whether it needs to raise rates (in May). But the short-term profile of inflation will have nothing to do with monetary policy, because it takes at least eighteen months – and some estimates suggest up to three years – for changes in rates to have their maximum impact on inflation. If the MPC jacked up interest rates now, inflation would fall more quickly – but in 2012, not in 2011.
The Committee is also clearly aware how much pressure household finances are under. Rising petrol and food costs, while only a temporary impact on inflation, will mean that households will feel the pinch this year. To reflect this, the MPC has downgraded its growth forecast – although, given that it also slightly upgraded its inflation forecast, and market expectations for interest rates are higher, this means that something else is going on in the background. This encapsulates the difficult judgement call the Committee has to make – while it cannot prevent the coming squeeze in living standards, it can influence how that adjustment happens. It can raise rates, push down on inflationary pressures, and risk a double dip recession. Or it can keep rates low, call for wage restraint, and hope the economy stumbles through to next year in one piece, when inflation should fall back. I for one think Mervyn and co are on the right track – and, on the basis of Wednesday’s performance, are serious about communicating to and convincing others as well. It may have been a while in coming, but the Old Lady looks to have finally found her voice.
* Please note this is an illustrative (ie made-up) figure
Comment
The real Budget giveaway
Chancellor Osborne’s second Budget was, by just about all measures, somewhat less exciting than his first one. Having already set the envelop for fiscal tightening over the life of this Parliament back in June, and followed that up with the Comprehensive Spending Review in the autumn, George had very little room for manoeuvre. The result was a Budget that was almost reminiscent of Gordon Brown – little big-picture news, but lots of fiddling with small policies to grab attention.
What rate rises will tell us about quantitative easing
Following the February MPC minutes and the clear signal from the ECB that it will probably raise rates next month, the monetary policy debate in the UK has shifted firmly to the pace with which policy should be tightened. While May still looks like the crucial month, however, the focus of that debate exposes something rather interesting about the Bank of England’s actions during the recession.
Does natural disaster imply economic catastrophe?
With fighting still ongoing in Libya, global events took a further damaging turn in the past week with the earthquake, tsunami and subsequent nuclear issues in Japan. The devastation from one of the largest quakes ever recorded is indescribable, with entire communities devastated. Faced with such widespread carnage, even the third-richest economy in the world is struggling to get relief supplies where they are needed.
How big will the bounce be in Q1?
As monetary policy makers sit down to discuss interest rates this week, and officials at HMT put the final details together for the ConDem’s first normal Budget, one question will be lurking in the back of everyone’s mind: what has happened to economic growth at the start of this year?
The Winsor report – a police officer’s response
We have now seen the first part of the Review of Police officers and staff Remuneration and Conditions report from Tom Winsor.
Gauging the impact of Middle East developments
The recent events in the Middle East, from Tunisia to Egypt, have been both a reminder of the power that individual people have to effect change, and the tragedy and suffering that can arise if the authorities use all means at their disposal to resist it.
Why Andrew Sentance may have delayed interest rate rises
The Bank of England’s Monetary Policy Committee (MPC) is moving ever closer to interest rate rises. That seemed to be the clear implication from the minutes of the MPC’s February policy meeting, where the divisions on the Committee widened further.
Which country is next after Gaddafi falls?
As Gaddafi uses the threat of total chaos in Libya if he is overthrown, Citywire reports on ten autocratic countries chosen by the Economist Intelligence Unit that could well be next on the list to follow suit should he fall.
Mervyn hits all the right notes
For much of this crisis, I have been a bit critical of the Bank of England. The financial stability risks that triggered the downturn were pretty much buried among a catch-all of about 87* other issues before the crisis, and when the storm broke Governor Mervyn King was worried far too much about moral hazard than the more practical issue of the UK banking sector collapsing. Add to that the fact that the MPC didn’t even start to cut interest rates until the UK economy had already been in recession for six months, and it’s not hard to see why the BoE hasn’t been flavour of the month in many people’s eyes.
One of the things I’ve been particularly critical about is the BoE’s communication about policy. In part, this reflected the mad scramble to come up with explanations for how quantitative easing would work – and then various different metrics for knowing whether it had worked or not. In part, it also reflected that fact that, in a Committee with 9 individuals, there are always going to be different views (and they can all get voiced in public). But, nonetheless, I still think the BoE could have given a far clearer steer on inflation and policy over the past three or four years.
Happily, there are signs that this criticism – albeit probably from more distinguished commentators than myself – is starting to have an impact. Mervyn’s speech on 25 January was pretty darn good, spelling out the issues facing policymakers very clearly. And his performance at Wednesday’s press conference, to mark the publication of the February 2011 Inflation Report, was masterful.
Although he probably leans towards the more dovish side of the Committee at the moment, Mervyn was at pains to emphasise the range of risks to inflation over the medium term, both on the upside and on the downside. He spelt out again that, whatever the MPC did, consumers would have to see the real value of their take-home pay fall. And he also described, plainly and in detail, the ‘relative price’ effects that are hitting the UK economy at the moment. One chart in the Inflation Report (4.8 on pg 36, in case you’re interested) put it very clearly – strip out the impact of VAT, energy prices and imports, and CPI inflation would be somewhere between -0.5% and +1.0%. While some may question the validity of this approach, the fact remains that unless VAT goes up to 22.5% in January 2012, or energy and food prices continue to rise (or sterling falls again), inflation will fall back in 2012. Permanently higher levels of food and energy prices, by themselves, have only a temporary impact on inflation.
To ram the message home, Mervyn then re-iterated what we all know but often forget – changing interest rates today will have very little (if any) impact on inflation this year. Ironically, inflation could even have peaked by the time the MPC really next gets to grips with whether it needs to raise rates (in May). But the short-term profile of inflation will have nothing to do with monetary policy, because it takes at least eighteen months – and some estimates suggest up to three years – for changes in rates to have their maximum impact on inflation. If the MPC jacked up interest rates now, inflation would fall more quickly – but in 2012, not in 2011.
The Committee is also clearly aware how much pressure household finances are under. Rising petrol and food costs, while only a temporary impact on inflation, will mean that households will feel the pinch this year. To reflect this, the MPC has downgraded its growth forecast – although, given that it also slightly upgraded its inflation forecast, and market expectations for interest rates are higher, this means that something else is going on in the background. This encapsulates the difficult judgement call the Committee has to make – while it cannot prevent the coming squeeze in living standards, it can influence how that adjustment happens. It can raise rates, push down on inflationary pressures, and risk a double dip recession. Or it can keep rates low, call for wage restraint, and hope the economy stumbles through to next year in one piece, when inflation should fall back. I for one think Mervyn and co are on the right track – and, on the basis of Wednesday’s performance, are serious about communicating to and convincing others as well. It may have been a while in coming, but the Old Lady looks to have finally found her voice.
* Please note this is an illustrative (ie made-up) figure
The human right to vote
Are politicians guilty of using the prisoners’ right to vote issue to just pander to public opinion and boost their own popularity?
Weale-y shocking
Having been out of the country for a couple of weeks, I had hoped for a bit of peace and quiet on the home front, with no major downside news to react to. Needless to say, the -0.5% GDP figure for Q4 (-2% on an Americanised basis, which made it worse) did not fall into that category.
Has Murdoch missed the boat with BSkyB?
It was recently thought that Rupert Murdoch’s purchase of British Sky Broadcasting was almost a formality. But there are now dark clouds on the horizon for the deal.